Types of NC assets
- Property, plant, and equipment
- Long-term investments
- Copyrights, trademarks, and other intangible assets
Understanding operating cycles
Noncurrent assets are assets that are likely to be converted into cash after one year or one operating cycle, whichever is longer. An operating cycle is the period of time from when a company first buys inventory or raw materials until the company actually collects cash from selling the finished product. Almost all companies have operating cycles of less than a year. And so the definition of current assets – for them – will be assets likely to be converted into cash within one year. However, some companies – such as wineries and ship builders – have much longer operating cycles (Paul Masson will sell no wine before it’s time). These companies therefore define NC assets as assets that are likely to be converted into cash within one of their (very long) operating cycles. For example, a company that produces widgets (with an operating cycle of three months) defines NC assets as assets likely to be converted into cash after one year. However, a winery that produces wine with an operating cycle of three years will define NC assets as those likely to be converted into cash after three years.
Impairments of noncurrent assets
You should test noncurrent assets for impairment at least once a year, or whenever an event occurs that indicates that the asset may have lost value.
Property, plant, and equipment available for sale
If a company makes a decision to sell property, plant, and equipment, and the company believes that it will be able to sell the asset within a year (or an operating cycle, whichever is longer), then you can move the asset to the current assets section of the balance sheet.
Managing noncurrent assets
Take special care when making investments in noncurrent assets. The purpose of all business assets is to generate revenues and net income for a business. Avoid purchasing assets that might not deliver an adequate return. Sell or dispose of assets that are not being used productively.